NEW YORK — Wellman Inc. this week became the third major U.S. fiber company to be caught up in a federal investigation into price fixing in the polyester staple industry.

This story first appeared in the July 8, 2004 issue of WWD. Subscribe Today.

The U.S. Department of Justice has been probing the activities of fiber makers during the period from September 1999 to January 2001, when rising oil prices were squeezing the margins of polyester makers, prompting them to seek several rounds of price increases.

Industry executives familiar with this case said the investigation got started after a DuPont executive approached the Justice Department with complaints about price fixing.

Conspiring with competitors to set prices and allocate customers is a violation of federal antitrust laws. Price fixing occurs when two or more companies that produce the same product meet to discuss common pricing or to coordinate a reduction in their output, which has the effect of increasing cost by decreasing supply, said Nicholas Economides, a professor at New York University’s Stern School of Business and a specialist in antitrust laws.

The government typically brings price-fixing charges after someone with knowledge of the conspiracy — either an employee of a conspirator or a rival company — complains to regulators or law enforcement authorities, Economides said.

Price fixing is most common in industries like fibers, where the competing products are fairly interchangeable, he added.

“The need to increase price based on reducing output is much larger for a commodity manufacturer, for firms that produce very, very similar products,” he said.

WWD reported on Wednesday that Wellman, based in Shrewsbury, N.J., revealed late Tuesday that the Justice Department was seeking to indict it on price-fixing charges. The company denies the allegations and plans to “vigorously” defend itself, a Wellman spokesman said.

The $1.11 billion firm had been cooperating with investigators for 3 1/2 years, and was only informed of the possible indictment on Tuesday, the spokesman said. “They just sent us a letter saying that we are a target for this investigation,” he said.

Federal investigators had been in contact with all major U.S. makers of polyester staple, including Wellman, KoSa, Nan Ya, DuPont and DAK Americas, during the inquiry, executives at those firms said.

Wellman said in a statement that investigators from Justice’s Dallas field office had informed the firm and two employees that they have become the target of a grand jury investigation.

A Justice Department spokeswoman in Washington said she “would not be able to comment or confirm the name of any company or companies that we may or may not be investigating.” But, she acknowledged, “We do have an ongoing investigation regarding the polyester staple industry.”

The probe’s biggest catch so far has been KoSa. The polyester unit of Koch Industries Inc. and one of its executives in October 2002 pleaded guilty to charges of conspiring with competitors to set prices and allocate customers. The firm agreed to pay a $28.5 million fine, while the executive, Troy Stanley, agreed to a $20,000 fine and to serve an eight-month prison sentence.

Koch Industries acquired DuPont’s former fibers unit in April and has since merged KoSa into that business, which is now called Invista.

The first federal charges were filed in September 2002 against Robert Bradley Dutton, a former employee of the U.S. arm of the Taiwanese firm Nan Ya Plastics Corp., also for price-fixing conspiracy. While foreign-owned, Nan Ya maintains manufacturing operations in Lake City, S.C. In January, the U.S. District Court in Charlotte, N.C., issued a not guilty ruling in Dutton’s case.

Polyester staple is most commonly used as an insulative filling in products such as ski jackets, puffy coats and comforters.

Wellman’s shares slid 8.9 percent to $7.27 on Wednesday in New York Stock Exchange trading.